After a recent bounce, Alibaba (NYSE:BABA) is down almost 20% from its 52-week highs. That’s notably better than the S&P 500, which is down about 27% from its highs. Given all the circumstances at the momentum, it’s hard to determine if Alibaba stock is outperforming or underperforming expectations.
While Alibaba is easily outperforming the S&P 500, it’s lagging what many would consider its peers. For instance, JD.com (NASDAQ:JD) is down just 6.5% from its highs, while Amazon (NASDAQ:AMZN) is down 11.3%.
So while there are some positives with Alibaba’s performance, there are some questions as well.
China Is Booming
Before getting into Alibaba, something must be said about the bigger picture here. The company operates out of China, which surely every investor knows at this point. With a population of 1.38 billion, it has the most people of any country on earth. China’s middle class is booming and growing at a staggering rate.
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For illustrative purposes, check out these two charts. The first shows the sheer size of China’s middle class. In 2002, the figure stood at just 80 million. This year, it’s projected to be 700 million people. That’s up almost 900% in less than two decades, and more than double the entire United States population.
The second chart, below, shows that in 2010, just 5% of China’s population was considered middle class. This year, that figure is expected to stand at 48%, highlighting just how much wealth has been created in the country.
These are the people who are driving growth in China. The middle class is fueling consumption, online ordering and GDP growth in China. As the world’s second-largest economy and most populous country, China is set for steady and strong growth down a long runway.
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Admittedly, COVID-19 will deal a setback to the Chinese economy. But it will do that across the world — it’s not as if China will be singled out amid this nasty outbreak. In time, though, China and the world will recover.
A Deeper Dive on Alibaba Stock
Because of the secular growth in China’s wealth, consumption plays are an obvious choice. It’s why we like JD.com so much too. But not only is Alibaba a much bigger play in commerce than JD, it’s also more diverse.
In 2019, 66% of Alibaba’s revenue came from China commerce revenue. That’s down notably from 79% in 2016, even though Alibaba saw a drastic increase in total China commerce revenue, (up more than 100% from 2017 to 2019). The reason that its share of revenue decreased, despite rising sales, is due to other growth segments making up a larger portion of the revenue pie.
For instance, cloud-computing revenue was up almost four-fold from 2017 to 2019, now making up Alibaba’s largest non-commerce revenue stream. Digital entertainment, it’s second-largest revenue generator ex-commerce, climbed 63% from 2017 to 2019.
The diversity is great, but the reality is Alibaba generates most of its revenue from commerce, for which it has a dominant position in China. Its Tmall platform represented more than 61% of total gross merchandise value (GMV) market share in Q4 2018. While shopping may take a hit in the short term, online shopping is a long-term secular growth story.
COVID-19 is bad for everyone, but at the end of the day, consumers still need to buy things. They aren’t leaving their house to do it, which leaves e-commerce — and Alibaba — there to answer the call.
BABA By the Numbers
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Over the last four quarters, Alibaba has generated $24.7 billion in net income on $70.6 billion in sales. Profit of $9.48 per share values Alibaba stock at roughly 19.6 times earnings. That’s a pretty darn good price for a company with multiple secular growth drivers (cloud, commerce, etc.) in motion in a country with a booming middle class.
A reasonable valuation for unreasonably solid growth is simply too good to pass up. Alibaba stock is a buy on dips, especially as it continues to outperform the broader market amid the coronavirus outbreak.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
